Archive for March 2nd, 2017

Harvard vs hard work: Shunning economic policy by elites?

March 2, 2017

It is interesting to see Indian PM slam the economists/experts who questioned the demonetisation drive.

The drive showed people did not lose any faith in the government against all expert advice. Moreover, now even GDP numbers are much higher than expected. So, experts have lost all possible arguments. People shunned their advice and  even their own GDP has deserted them now (But experts have not given up. It has led to comparing Indian GDP data with Chinese GDP ; more on this later).

Indian PM says hard work not Harvard matters:

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Central Bank of Nigeria’s forex crisis..

March 2, 2017

After Central Bank of Barbados crisis, something has been brewing in Central Bank of Nigeria too. Though, Barbados is unique in terms of what was seen and the Governorship issue not seen here. But on both countries exchange rate has become the bone of contention.

The currency had depreciated seriously in month of Feb leading to a new policy by the central bank. This has led to some immediate appreciation but overall concerns remain.

Nigeria is dependent on imports which are financed by oil exports. As oil prices dipped recently, the troubles started:

Without equivocation it can be stated that the present forex crisis is a consequence of the play out of several factors bordering on its acute scarcity and poor management of same. Import dependent as the Nigerian economy traditionally is, the fall in the international price of oil eroded over 50% of its forex earnings, leaving it with a drastic shortfall of the funds. Even at that the CBN gad been operating a most wasteful forex management regime in which at least 11 different rates are operational, which leaves a wide room for abuse and attendant leakage and wastages. Even with the present new regulations the apex bank seems not to have learnt its lessons especially as such pertains to the problem of multiple exchange rates.

In the light of the widespread abuse of the process the CBN should harmonise all official exchange rates into one, which can be linked with the floating market (black market rate), and adopt voucher schemes for any area in which it considers to grant concessions. The voucher scheme can be designed to incorporate tax reliefs and breaks for dedicated areas of the economy, where fiscal policy can provide additional targeted support. 

The ultimate panacea still remains the redesign of the country’s economic policy to favour a determined diversification of the economy in order to generate forex from sources other than oil and to also reduce this country’s near criminal dependence on all manner of foreign-made consumer goods.

Due to the oil shock, Nigeria had imposed stiff foreign exchange regulations earlier which have been undone recently. In Nov 2016, qz reported:

This isn’t the Central Bank’s first tactic to attempt to control the forex market. A year ago, with oil prices down and government earnings slowing, the apex bank adopted a fixed exchange rate as local banks put limits on spending on debit cards outside the country. In June, after several months of criticism of its currency policies, the Central Bank agreed to float the naira and allow the value of the currency be determined by market forces. But given the stability in the currency’s official value despite the devaluation, the Central Bank’s move was described as a “managed float.”

Despite its stated goal of trying to stabilize the foreign exchange market and resolve the persistent dollar shortage, the Central Bank has curiously made several moves that have worsened the crisis. It has barred banks from forex trading and cracked down on money transfer operators, an important source of forex for the local market through remittances from the diaspora (both bans were later lifted).

The bank’s unorthodox moves are believed to be backed by government which has also played its part in worsening an already bad situation. Last week, state security agents raided bureau de change operators accused of “unnecessarily hiking rates“, a move which has only worsened the dollar scarcity.

How these bans have similar story across countries. And how central bank eventually face the flak much of which is doing of the government, though that does not mean central banks have no faults.

This piece argues for a float of the Naira:

We are at this point because as revenue from crude oil sales have dropped drastically over the past two years, this administration has been insistent on not floating the naira against the advice of experts, both local and foreign.

As a result, the CBN has been dancing to its tune by trying ‘demand management’, cutting down the number of people accessing forex officially through the introduction of a list of 41 items for which importers cannot get cheap dollars. The end result is obvious – it has forced people to the parallel market and created such a wide difference between the official and black market price and allegations of a forex subsidy scam taking place.

The end results of the refusal to float the naira cannot be overemphasized: companies and manufacturers are starved of forex to import raw materials, leading to staff being laid off; foreign investors are staying away in order to avoid losing their investments, and the economy continues to lose overall as a result.

This new p0licy is the latest in a string of moves by the CBN and the Federal Government to make forex more available and cheaper but without floating the naira. This is because all other policies have failed: banning importers of certain items from accessing forex officially, claiming to float the naira but not really floating it, directing banks to not sell forex to international money transfer organizations, and then instructing them how to allocate their forex. All of these have failed in making forex available and cheaper.

 This is because the CBN is disregarding well-established laws of economics and trying to achieve this objective through the backdoor. Based on recent history, it is safe to say that this recent appreciation of the naira is only a temporary reprieve.

The CBN should stop trying to hide its head in the sand when it comes to knowing the solution to our monetary policy crisis and it should move ahead to genuinely float the naira.

On its own part, the Federal Government should throw its weight behind floating the currency, and then moving forward with the necessary reforms that will move our economy forward. Its continued insistence in not floating the naira is a primary reason that there is such a wide difference between official and parallel prices of the dollar and only makes it easier for people to engage in round-tripping.

The longer we refuse to do the necessary thing, the deeper we sink into this economic morass.

 

If plastic replaces cash much that is good will be lost…

March 2, 2017

Brett Scott has a one of the best pieces on war on cash written so far.  He sums up the issues nicely.

He first starts with his experience when one of the payment machines refused his card. Based on this, he writes how there are two kinds of cash. One is the physical fiat cash which we hold in hands and other is digital cash which we hold in our bank accounts. The latter one is used to make payments from one bank to another. Banks naturally hate the physical cash as they have to run ATMs etc to dispense the cash. They would love the digital world where money remains in hands of banks and they can keep playing with it.

However, there are two more players which are interested in war on cash:

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Demand for Virtual currencies replacing traditional currency has always been there…Is this time any different?

March 2, 2017

RBI DG R Gandhi has a speech on two upcoming opportunities/threats in finacial industry – fintech and virtual currency (VC).

On VCs (there was a time when VC meant Venture Capital) he says this idea that VC will lead to death of currency is hardly new. These ideas have been there for a while:

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